Facing weaker than expected state tax revenues, Governor Deval Patrick’s administration has curbed state hiring, halted an automatic income tax reduction, and begun identifying cuts in spending that may be necessary to balance the budget.
Recent tax collections have been unexpectedly disappointing, failing to measure up to last year’s levels. In October, revenues were $162 million short of budgetary estimates and $48 million below the level reached in October 2011.
State revenues are running $256 million behind budget and $33 million behind last year’s actual collection, officials said.
Together the numbers add to the picture of a slow economic recovery and portend a daunting start to the new year for a governor already struggling with a state drug lab crisis and a fatal meningitis outbreak traced to a Massachusetts compounding pharmacy.
The news is consistent with reports showing that the recovery, which had been on its way in Massachusetts, is slowing down. In recent months, the Massachusetts unemployment rate has climbed slightly and the state’s economic growth, which had been outpacing the nation, fell behind.
The dropoff in tax revenues is not dramatic, compared to the recent recession, but it is a disheartening trend in the wrong direction. After years of belt-tightening, fiscal observers were hoping to have more room to breathe in the coming year’s budget and to begin restoring some of the spending cuts that had been made to programs. Now they see no relief in sight.
“If this were happening at the beginning of a recession, it would be seen as . . . not a dramatic shortfall,” said Michael Widmer, president of the Massachusetts Taxpayers Foundation. “But when it comes in year five of this extended fiscal crisis, it’s a serious issue.”
As a result, Patrick’s budget chief has imposed constraints on discretionary spending and asked agency heads to start identifying spending cuts.
“I think there’s a strong likelihood that we will very soon be revising the budget estimates downward and make some budgetary reductions,” said Jay Gonzalez, secretary of the Executive Office for Administration and Finance.
“We’re in a position to act quickly,” if cuts become necessary, said Gonzalez, noting that his office is analyzing potential cuts and developing recommendations. He also contacted non-executive agencies, such as the judiciary, to ask them to identify spending reductions.
Some tax-control advocates suspect that Patrick is preparing to raise taxes in the budget he unveils in the new year.
“They’re going to be looking at a tax increase,” said Barbara Anderson, executive director of Citizens for Limited Taxation.
After last week’s report on the gaping deficit in funding for the state’s transportation system, Anderson predicted the Patrick administration would propose boosting not only the gas tax but also the income tax to manage the rest of the budget.
“If there is a deficit, that’s what they’ll look at. It’s the quickest, easiest, fastest money,” she said. “The voters just voted in the same people who would be inclined to raise taxes and against those who had taken pledges not to raise taxes. I won’t be surprised.”
Ironically, the state had expected to issue an income tax reduction in January, which would have been triggered automatically by sustained growth. For only the second time in recent years, the state was expected to shave the income tax by .05 percent, but the disappointing tax collections of the fall canceled that plan.
Had the tax cut been implemented, revenues would have dipped by another $57 million. That was one of the concerns Gonzalez reported to the governor last month, when he instituted immediate financial controls to curb state spending.
Other uncertainties still remain.
The so-called “fiscal cliff” — the spending cuts and tax increases that would kick in if the president and Congress fail to reach consensus on federal debt reduction — threatens to send the nation into another recession and Massachusetts into a deeper problem.
If the federal standoff is not resolved, Massachusetts is estimated to lose another $300 million in tax revenue this year and $1 billion next year, as well as $200 million in direct federal funding, Gonzalez said.
The spending cuts that would take effect in the new year would also disproportionately hurt Massachusetts, since some of the state’s top industries rely on funding from the federal government. Defense dollars in Massachusetts would drop $1.2 billion andNational Institutes of Health funding would drop almost $200 million, Gonzalez said.
The state has some cushion, because it has built up its so-called rainy day fund, to $1.65 billion, the third highest in the country, Gonzalez said. Budget officials will not rely on that fund to sustain much of the budget, but could tap it for some relief, he said.
Initial revenue numbers for November suggest a somewhat brighter outlook. The numbers for the first half of the month were up 6.3 percent over the same period a year earlier. But Gonzalez cautioned that midmonth results can be deceiving.
Taxpayers recently weathered a 25 percent rise in the sales tax and new taxes on alcohol; the Patrick administration also gave cities and towns the right to boost meals taxes and local hotel taxes and unsuccessfully called for boosting gas taxes and taxing candy and soda.
The administration intends to release a plan in early January to close the transportation finance gap.
Asked about the possibility of a gas tax increase, Gonzalez said, “There are some people out there arguing that’s what we should do. The governor proposed that a few years ago. And that didn’t go very well.”
Gonzalez said it would be “premature” to conclude that the administration would seek additional broad-based tax increases.
“We’re in the middle of budgetary planning process for fiscal year. Certainly the slowdown in economic growth is projected to last for a while, so we need to take that into account in developing a revenue estimate for the next fiscal year, and there’s no doubt we’ll have challenges for the next fiscal year.”